Egypt’s Savings Vacuum Shows Struggle for Banks: Islamic Finance

Murad Hassan, who owns a stationary
shop in Cairo, doesn’t keep his money in a bank, and says
expanding Shariah-compliant finance under Egypt’s new Islamic
government won’t change his mind.

The 43-year-old father of three rarely has more than $500
in excess cash, which he uses to stock up on school supplies for
his store on a street lined with small family businesses in
Matariya, a low- to medium-income neighborhood in northeast
Cairo. “It’s never a large enough sum to consider doing more
with it,” he said in an phone interview Oct. 21.

Hassan isn’t the exception. Nine out of 10 adult Egyptians
don’t have a bank account, the Middle East’s lowest ratio apart
from Yemen, according to the World Bank. The lack of clients
underscores the struggle Islamists face to promote Shariah-
compliant financing after last year’s revolt propelled them to
power. For Islamic banking to flourish in the majority Muslim
nation, President Mohamed Mursi must lift economic growth from
2011’s 19-year low of 1.8 percent, Capital Economics Ltd. said.

Mursi, who became Egypt’s first democratically elected
leader in June, is preparing laws to increase the share of
Shariah-compliant deposits from 6 percent now, and enable
borrowers to sell bonds complying with Islam’s ban on interest.

The plans haven’t yet jolted banks into action. Commercial
International Bank Egypt SAE (COMI), the biggest publicly traded
lender, is still “testing the waters” on whether to tap
Islamic finance, Mohamed El Toukhy, chief executive officer of
consumer banking, said in an Oct. 9 interview in Dubai. Only 1
percent of Egyptians with bank accounts have saved money in the
past year, the World Bank said in an April report.

Little Savings

“The fact that saving ratios are low and that many
Egyptians are poor bodes ill for both Islamic and conventional
banks,” Said Hirsh, London-based economist at Capital Economics
Ltd., said in an e-mailed response to questions Oct. 22. “This
could change if the Egyptian economy were to grow at a faster
rate in the future, around 7 percent a year, with more citizens
sharing in this growth.”

The last time the economy expanded that fast was in 2008,
the same year foreign direct investments rose to more than $13
billion. It will take until 2016 for growth to reach 6.5
percent, according to International Monetary Fund estimates.

The fall of autocratic rulers who long oppressed Islamists
has fueled speculation that governments and consumers will turn
to Shariah-compliant finance. The ultra-orthodox Nour Party,
Egypt’s second-biggest Islamist group after the Muslim
Brotherhood, seeks to eventually phase out the current banking
system, replacing it with one that bans interest. Global Islamic
financial assets will double by 2015 to as much as $3 trillion,
Standard and Poor’s said last month.

‘Exaggerated’ Potential

“Let’s not give too much weight to the ravings about
Islamic banking in Egypt,” Abdul Hameed Abu Musa, governor of
Cairo-based Faisal Islamic Bank of Egypt, said in a phone
interview Oct. 22. He dismissed as “exaggerated” estimates by
groups such as the Muslim Brotherhood’s Freedom and Justice
Party that Islamic deposits and lending may expand six-fold in
the next five years.

Only three of the 39 banks operating in the most-populous
Arab country are fully Shariah compliant. Real credit growth to
private businesses and consumers may shrink 5.9 percent this
year and 5.4 percent in 2013, according to HSBC Holdings Plc
estimates. That compares with 4.3 percent 2012 growth in
Tunisia, where a popular uprising broke out in December 2010
that set off a wave of political unrest across the Middle East.

Deposits Growing

Still, Islamic deposits could almost double to 10 percent
of the total by 2017 if the economy recovers, Abu Musa, 70,
said. Funds managed by Faisal Islamic soared 16 percent, or
about 4 billion Egyptian pounds ($656 million), in the first
nine months. Sixty percent of deposits range between 500 pounds
to 30,000 pounds in size, he said.

The government is also confident a debut sukuk sale will be
well received once a law is passed and the nation secures a $4.8
billion loan from the IMF. Foreign banks have expressed interest
to buy as much as $1 billion of the debt, Finance Ministry head
of debt management, Samy Khallaf, said by e-mail Oct. 17. Global
sukuk sales have surged almost 80 percent to a record $39
billion this year as borrowers benefit from record-low yields.

In the Arab world, only Qatar, Bahrain, as well as Dubai
and Ras Al Khaimah in the United Arab Emirates, have sold
sovereign dollar-denominated Islamic debt, data compiled by
Bloomberg show.

Tapping the Unbanked

The yield on Dubai’s 6.396 percent sukuk due November 2014
plunged 295 basis points, or 2.95 percentage points, to 2.63
percent today, according to data compiled by Bloomberg. The
premium investors demand to hold the sukuk over Malaysia’s
investment-grade 3.928 percent notes maturing in June 2015
plunged 165 basis points to 122.

“The retail is a chance for everyone not just Islamic
banks,” Emad Mostaque, London-based strategist at Religare
Hichens Harrison, said Oct. 15 by phone. “But now that you have
an Islamic leadership, it’s probably going to have a better
chance than it would have otherwise.”

Traditional Methods

It may be difficult to coax Egyptians to abandon
traditional savings methods in favor of banks. Wael Amin, a 37
year-old primary school Arabic teacher, keeps his extra cash at
home or buys gold with it, turned off by some Islamic scholars
who contend that banking involves reba, the Arabic term for
usury, which is banned by the religion.

“Islamic banks aren’t much different in my opinion because
they are based on the same traditional banking models, so I stay
away,” he said in an interview Oct. 21 in Cairo.

Many Egyptians, including Amin and Hassan, use the informal
interest-free saving method known as a gama’iya, under which a
small group of people agree to contribute a fixed amount to a
collective pot at defined intervals, such as monthly. Each time,
one member collects the entire sum, which can be used to pay for
purchases like furniture, cars or wedding jewelry.

This method of borrowing is useful for Egyptians who would
otherwise be unable to secure a loan from a bank. The economic
crisis has forced the unemployment rate up to 12.6 percent in
the first quarter, the highest since Bloomberg started tracking
the data in 2003. “I keep waiting for the market to pick up,”
Hassan said.

Faisal Islamic only lends to consumers as part of
agreements with companies or trade unions because it is
concerned customers’ won’t be able to repay, said Abu Musa, a
former central bank board member. The bank has 30 branches in
Egypt, compared with Commercial International Bank’s 153
branches and HSBC’s 100.

“Next year, we will add between three to four branches,”
Abu Musa said. “We work in a society where for a long time it
was hard to operate as an Islamic bank. This has changed
dramatically, but we have to be cautious.”